Monday, 17 August 2009

The new data for China's foreign trade for July strongly confirms the trend analysed in a previous post on this blog of the strong decline of China's trade surplus.

China's trade surplus in July was $10.6 billion – a fall of 54% compared to the same month in 2008.

This drop reflected the continuing trend whereby China's imports, $94.8 billion in July, have declined much less rapidly under the impact of the financial crisis than its exports - $105 billion in July. In terms of year on year changes China's exports have fallen 23.0% while its imports have only fallen by 14.9%.

There was a small month on month increase in China's surplus compared to June's $8.3 billion, but this was well within the range of expected monthly variations and the 3 month moving average of the surplus declined sharply from $17.3 billion in June to $12.5 billion in July.

The annualised 3 monthly moving average of China's trade surplus was $270.2 billion at the time of China's peak exports in August last year, it rose temporarily under the impact of the financial crisis to a $457.1 billion in January, and is now running at an annualised $150 billion. China's trade surplus has therefore fallen by almost half from the pre-financial crisis levels.

These trends can be seen clearly in Figure 1, which shows China's monthly trade surplus, and Figure 2 which graphs, in order to eliminate purely short term fluctuations, the 3 monthly moving average for China's trade surplus.

The decline of China's trade surplus means that both major 'global imbalances', the other being the US balance of payments deficit, are falling sharply. The reason the US deficit is declining is because US savings are declining but US investment is falling even more rapidly - the result of the sharp US recession. In China investment is rising as a proportion of GDP shrinking the trade surplus and accelerating the economy.As this issue is extremely important for understanding the key trends in the world economy readers may wish to read the article on it on this blog.

While China's trade surplus has shrunk China's year on year growth in the first quarter was 7.1% and accelerating - year on year growth in the second quarter was 7.9%. China's statistical services do not produce official figures for quarter on quarter GDP growth, because it states its seasonable adjustments to economic output are not yet accurate enough, but private economic organisations estimates of annualised growth in the second quarter were 13-15%.

China's official projection for GDP growth this year remains at 8.0%, and other Chinese experts are projecting 8.3%, but Goldman Sachs has increased its prediction of this years GDP growth to 9.4%. While the stimulus package is clearly having a powerful effect the external environment for trade remains very negative and while the Goldman Sachs prognosis certainly cannot be discounted it would appear premature to take as a central perspective that China's growth will significantly exceed the 8.0% central projection.

What the combination of accelerating economic growth and sharply dropping trade surplus does refute is the analysis of those such as Professor Michael Pettis, V. Anantha Nageswaran and others who believe that China's growth is due to an 'Asian model' dependent on large trade surpluses.

China is quite right to aim at a high proportion of exports in GDP, which allows it to benefit from efficiencies flowing from the international division of labour and economies of scale, and this is an integral and necessary part of its growth model. However a large trade surplus, that is a high level of exports unaccompanied by an equivalent high level of imports, does not flow from any economic theory and is not required by China's economic growth - as is confirmed by Figures 1 and 2 which show that the large trade surplus appeared only after 2005 and is now rapidly declining. China's rising rate of investment with its stimulus package is simultaneously allowing its economy to expand rapidly and its trade surplus to shrink.